China Evergrande takes countermeasures as delisting deadline approaches
As the delisting deadline for China Evergrande looms closer, the company has started implementing various measures to address the situation. China Evergrande’s trading has been suspended since March 21, 2021, and if trading does not resume before September 21, 2023, the company will enter the delisting process.
Recently, on the evening of August 21, China Evergrande released an announcement regarding the main results of the internal control assessment and the review of certain issues raised by the former auditor. The purpose of this disclosure is to fulfill the additional resumption guidelines issued by the Hong Kong Stock Exchange.
These guidelines include assessing the integrity of the company’s management and anyone who has a significant impact on its operations, as well as conducting an independent internal control review to ensure compliance with listing rules.
China Evergrande’s latest announcement also addresses concerns raised by PricewaterhouseCoopers when it resigned as the company’s auditor earlier this year. PricewaterhouseCoopers mentioned not receiving information on major matters related to Evergrande’s 2021 consolidated statements, including potential off-balance-sheet wealth management products and other off-balance-sheet liabilities.
In response, China Evergrande appointed Luo Shenmei Consulting Co., Ltd. to review internal control and procedures related to the additional resumption guidelines, and Crowe Horwath (Hong Kong) Risk Management Co., Ltd. to review the issues raised by the former auditors.
Luo Shenmei’s review identified deficiencies in three aspects: the internal monitoring environment of the enterprise, financial reporting and information disclosure, and process-level control. One specific deficiency highlighted by Luo Shenmei was the lack of written policy on money management and liquidity forecasting.
Crowe Horwath’s review focused on Evergrande’s potential off-balance sheet liabilities and pledge guarantees. It pointed out shortcomings in compliance monitoring and monitoring and reporting mechanisms within Evergrande. Crowe Horwath also found that Evergrande had raised approximately 92.1 billion yuan through wealth management products and had provided guarantees for those products.
In response to the test results, China Evergrande stated that it had established procedures for seal usage, contract approval, and management. However, the company admitted that there were areas for improvement, such as proper record-keeping, preservation of documents, and systematizing contract classification.
Despite these findings, China Evergrande’s board of directors expressed confidence that the corrective measures implemented by the company would address the major issues found in the internal control system and processes.
To meet the additional resumption requirements, China Evergrande has been taking actions to disclose financial results and provide information to shareholders and investors. However, Rule 13.24 of the Listing Rules remains a significant hurdle for the company. This rule requires the issuer’s business to have sufficient business operations.
With 30 days left before the delisting deadline, China Evergrande continues to work on resolving the issues raised and ensuring compliance with listing rules. The company’s future remains uncertain, and its ability to resume trading and avoid delisting will depend on the effectiveness of its countermeasures.